Build the Budget / Process

2.2.2P Build the Budget / Process

Is Managing Costs Important to You? (2.2.2P.P1)

This may seem like a strange question to start off this section. But it is true that a vast number of project managers – maybe a majority – are not held accountable for budget. In some companies this would be crazy talk. However, many companies do not worry about project budgets. There are a number of simple reasons

Departmental budgeting. Many companies do not budget at a project level. They budget at a department level and only allocate costs at a department level. In these companies most of the labor costs are for internal employees and these employees are budgeted for centrally at a department level.
No time reporting. You are not going to be able to allocate labor costs to projects if you do not have a way of understanding the effort hours allocated to a project. For many companies, the effort and costs associated with time tracking are not worth the projected benefits.
Lack of financial system support. Many companies do not have their financial systems set up to track costs at a project level. Their financial accounting systems are not set up to handle project level tracking or reporting.

If your organization does not track costs then it is unlikely that the project manager will be held accountable for estimating costs and managing a budget. In that case the sections in the TenStep process for building the budget and managing the budget will not be utilized.

Are External Costs Important to You? (2.2.2P.P2)

In some companies the project manager is not held accountable for internal costs, but he is held responsible for external costs. These may be allocated and tracked at a project level. In this case, internal labor costs may not be important, but any labor or non-labor costs paid to outside vendors would be important for the project manager to estimate and subsequently manage.

The rest of this section assumes that you are a manager that is held accountable for meeting budget expectations.

This section describes the process for building a budget.

Small Projects (2.2.2P.P3)

A small project is generally not going to have a large budget. The budget may simply be a matter of multiplying the effort hours by the resource costs per hour. Non-labor charges will generally also be small and easy to account for. You are probably not going to have things like training costs or team-building costs on a small project. If you have a small project with a large budget, then follow the process for building a budget for medium to large projects.

Medium and Large Projects (2.2.2P.P4)

Role

Building a Budget from Scratch

Project Manager

Create Cost Management Plan

This document defines and communicates how the budget will be built and maintained throughout the project. It is part of the Project Management Plan. See 2.1.3.7P Create Cost Management Plan for more details.

Estimate Costs (2.2.2P.P5)

Project Manager

Estimate the cost of the project

There are two major components to the budget – labor and non-labor costs. After your schedule draft is completed, you will understand the labor resource requirements. This will give you’re the information necessary to complete the initial budget estimate. Labor can be estimated based on the resources (or types of resources) on your schedule.

You can then add non-labor expenses, including travel, training, hardware, software, supplies, etc. You may have known many of the non-labor costs earlier, but you can consolidate all of the labor and non-labor costs now. You can use estimating techniques found in 2.2.1.1P Estimating Effort and Duration and 2.2.1.2T Estimating Techniques for Schedule and Budget.

It is likely that you will want to break the project cost estimate into distinct elements for tracking purposes. See 2.1B.6 Cost Accounts for more information.

Determine Budget (2.2.2P.P6)

3	Project Manager	Review the cost estimate to see if it makes sense You need to feel comfortable to defend your cost estimates to your manager and sponsor. If you feel that the budget doesn’t reflect what you need, make the necessary changes. You should feel comfortable that this estimate of project budget is within 15% before you start the project. The bottom line is that when you provide the estimate for your budget, others may question your numbers. If you don’t feel comfortable enough to back them up, you have more work to do, In other words if you cannot defend your numbers, you should spend more time trying to create an estimate that you feel confident in.
4	Project Manager	Finalize and allocate budget Now that the schedule is finalized and you have estimated the total cost of the project, you can establish your project budget. On some projects this may be one budget at the aggregate level. On larger projects, you may establish cost accounts for each work package or for a group of work packages. See 2.2.2.2P Cost Accounts for more detail.
5	Project Manager	Determine the Budget Spend Rate The project manager needs to track the actual spending on the project against the estimated spending for the project. For example, it is not enough to just say that the project is half over and the budget is half spent. This does not really give you the information you need to manage the budget. To track spending against the budget, the project manager needs to understand the rate of spending on the project and the amount of work that is completed for the budget used. Therefore, when the budgets are established, the project manager needs to be able to tie the numbers back to the schedule – either by individual activity, deliverable, phase, etc. It is only by tying the budget back to the schedule in this way that the project manager will then be able to manage the budget effectively once the project starts.
6	Project Manager, Finance	Determine the Budget Release Rate It is possible that when you start the project the entire budget will be made available to you to spend as needed. However, as projects get longer, it is more likely that the budget will be made available at various increments in the project. This would make sense for long project. Let’s say your project was scheduled for three years. Your company is probably not going to allocate three years of funding and let the funds sit there waiting for you to spend them. It is more likely that the budget for the first year will be made available to you when the project starts. The budget for the second year may be available at the start of the second year. The same thing would apply to the third year. It is also possible that funding for the next phase is released at the end of the prior phase. Releasing incremental funding serves two main purposes. It allows the company to better manage cash flow. It provides a checkpoint to make sure the project is on track and progressing as expected before the next funding is released. If you are going to have this level of budget control, the control must be established when the budget is established.